Bond, Market Bond: A License to Yield

Markets are shaken, not stirred, as bond yields surge and recession fears loom. Join us as we decode the high-stakes world of rates, tariffs, and global market espionage in 2025.

Summary – IBKR Podcasts Ep. 235

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Well, what a start to 2025. There are so many moving pieces—not just in U.S. policy, but also in how it’s impacting international policy and the response to the daily machinations of the White House. And with that, welcome back to the series. 

Eric Norland. Eric is the Group Economist with CME Group over in Europe, based in London. Eric, how are you? 

Erik Norland 

I’m doing well. How are you? 

Andrew Wilkinson 

Trying to keep up with the news and the market. 

Erik Norland 

Yes, it’s a challenge, isn’t it? 

Andrew Wilkinson 

It’s a busy time, and I guess we should just let the audience know that our roles are reversed—I’m an Englishman in New York, and you’re an American over in London. So you’re very well positioned to gauge the European response to tariff proposals as well as the delicate Ukraine-Russia conflict. 

How is the Trump administration being received in Europe, do you think? 

Erik Norland 

They’ve hit basically all imports of steel and aluminum into the United States with tariffs, so that will have some impact here in Europe. I think the Europeans are still calibrating their response to that. 

We’ve already seen a Canadian response earlier today—Canada hit the U.S. with tariffs on about $21 billion worth of goods, which amounts to 30 billion Canadian dollars. That’s a tiny portion of the trade that Canada does with the U.S.—Canada imports somewhere around $350 or $400 billion worth of goods. So this probably concerns about 5 or 6 percent of what Canada imports from the U.S. 

Europe might respond with something similar—something calibrated. It won’t be an overwhelming, forceful response. I don’t think there’s a desire in Europe to escalate and see the trade war deepen as we go into April. 

Andrew Wilkinson 

I think last week I saw on Bloomberg Television, it was Mohamed El-Erian who pointed out that every single one of the so-called “Trump trades” that investors assumed would work out when his policies took effect has been turned on its head. 

How surprised are you? Let’s start with the dollar. How surprised are you that the dollar has weakened significantly during the first quarter? 

Erik Norland 

You have to remember that the dollar had a huge rally heading into the fourth quarter. Starting around September 30th, when the odds started shifting in Trump’s favor to win the election, the dollar saw a big rally—about 9 percent on the Bloomberg Dollar Index. 

Now, it’s lost about half of those gains, so it’s still 4.5 percent higher than it was in September. What’s interesting from a trader’s perspective is that the dollar has been weakening at the same time the equity market is falling. That’s an unusual relationship—sometimes, it moves in the opposite direction. 

Andrew Wilkinson 

Very recently, the ECB cut rates. Let’s talk about that. It’s a bit unusual for the euro to rally as yields are declining, right? 

The euro has been pretty weak, especially with a backdrop of insipid growth in the Eurozone. How does last week’s rate cut address the economy, and where does it leave the path for rates from here, do you think? 

Erik Norland 

The ECB has been very aggressive in cutting rates—they’ve cut rates much more deeply than the Fed has. I think that’s in part because, up until now, the European economy was much weaker than the U.S. economy. The U.S. had a really strong 2023 and 2024—Europe simply didn’t experience the same growth. 

So they felt they had to get rates back down, even though core inflation in the euro area—just like in the U.S.—is still running above target. What’s interesting now is that this trend may be inverting. 

We’re seeing the potential for massive fiscal easing in Germany. They’re preparing to significantly expand their budget deficit to support infrastructure and military spending, which could provide a significant fiscal boost to Europe. Meanwhile, the U.S. is moving in the opposite direction toward fiscal austerity. 

The Trump administration inherited a large budget deficit of 7.3 percent of GDP. Now, they’re introducing tariffs, which are essentially a form of taxation, while also slashing government spending. This could potentially slow the U.S. economy just as Europe begins to accelerate. 

Andrew Wilkinson 

Let’s go deeper into that. The flip side is the recent surge in German bond yields. The yield on German government debt is wrapped up in how America is dealing with its status as an international peacekeeper. 

What are the takeaways on European fiscal policy, defense spending, and the outlook for yields? 

Erik Norland 

The United States has complained for decades that Europe didn’t spend enough on defense—many countries were hovering around 2 percent or even below 2 percent of GDP. 

Now, with the U.S. shifting its foreign policy quite dramatically, there’s a lot of pressure in Europe to boost defense spending. Germany, in particular, has underinvested in infrastructure and has had two years of negative GDP growth. 

Before the current Bundestag exits and a new one comes in, they’re taking advantage of the centrist majority to loosen fiscal rules and boost both defense and infrastructure spending. 

Germany is in a unique position among European countries to do this for two reasons: 

1. Their budget is roughly balanced—they’re not running a significant budget deficit. 

2. Their debt-to-GDP ratio is very low—around 59 to 60 percent of GDP. 

Contrast that with countries like France and Italy, which are running budget deficits of 6 to 7 percent of GDP, with debt-to-GDP ratios well north of 100 percent. 

Germany has the flexibility to pursue massive fiscal expansion, and this will spill across its borders—Germany trades heavily with the rest of Europe. This could help rebalance the entire European economy. So I think this is bullish not just for Germany but for Europe more broadly. 

Andrew Wilkinson 

President Trump recently refused to rule out a U.S. recession, and U.S. stock markets are faring worse than other global bourses. 

Is U.S. exceptionalism dead, do you think? 

Erik Norland 

That’s a difficult question, but I don’t really believe any country is ever truly exceptional. Ultimately, all economies operate under the same fundamental rules. 

The U.S. has been doing well in recent years because it has been running enormous fiscal deficits. The government provided much more COVID-related aid than other countries—under both the Trump and Biden administrations. 

Additionally, the Inflation Reduction Act and the CHIPS and Science Act contributed to large budget deficits, which in turn boosted the growth rate. But now, with fiscal policy shifting, the big question is whether the U.S. can maintain that momentum. 

Now, that’s going in reverse. The U.S. is now looking at lower rates of government spending and potentially higher taxes through tariffs—although there could be other tax cuts in the future. We’re not sure about that yet. 

Treasury Secretary Scott Bessant was, for a long time, a very successful trader with George Soros and later on with his own firm. I think he’s a strong believer in the concept of reflexivity—the idea that narratives dominate markets. When people come to believe optimistic things, such as stock prices going higher, they consume more and invest more, which pushes stock prices even higher. 

Right now, I think the rhetoric over the last few days about the U.S. potentially facing a recession is threatening to take that virtuous spiral and send it into reverse. That’s why we’ve seen statements from the Treasury Secretary, the Commerce Secretary, and the President in recent days—trying to reassure the public and restore confidence by saying, No, in fact, we’re not going to have a recession. 

Andrew Wilkinson 

Now, I’ll shift to international relations. Canada, in particular, has taken exception to Trump’s actions. How do you expect other world leaders to respond? Will Trudeau and Carney be more confrontational, or will they take a more accommodative stance like Britain’s Keir Starmer? 

Erik Norland 

Keir Starmer is in a unique position because he hasn’t been hit with any tariffs yet. So we don’t know how he would respond if he were. So far, what we’ve heard from the White House is that there might be tariffs on the European Union as of early April. But Britain, of course, is not part of the EU. 

The only country where we have a clear example of a response is China, which has retaliated by imposing 10 to 15 percent taxes on various U.S. agricultural goods, along with some more targeted tariffs. Canada has also responded with tariffs on $21 billion worth of U.S. goods in reaction to the steel and aluminum tariffs imposed by the U.S. 

I expect Europe will likely respond proportionately. If they’re only hit with aluminum and steel tariffs, their response will probably be relatively mild because they don’t want to escalate into a full-blown trade war. However, if the U.S. imposes much broader tariffs, then Europe’s response could be significantly more severe. 

Andrew Wilkinson 

Are you optimistic about 2025, Erik, or not? 

Erik Norland 

I haven’t been optimistic about 2025 for a while—in part because I’m an economist. They call economics the dismal science for a reason. 

My reasoning so far has been that the Federal Reserve and many other central banks implemented massive rate hikes throughout 2022 and 2023. The effects of monetary policy tightening often hit with long and variable lags. My concern has been that, despite the fact that central banks are now easing, some of those high interest rates from previous years are going to come home to roost in 2025. 

On top of that, uncertainty over rapidly changing government policies has the potential to depress consumption, investment, and government spending—three of the four key components of GDP. That adds to my concerns, and apparently, the market’s concerns as well. As I look at my screen now, after several down days in the S&P 500, the index is down for the third time this week—without any bounce yet. 

Andrew Wilkinson 

And that’s despite good inflation numbers today—March 12th, Wednesday, as we’re recording. 

Eric, thank you very much for joining me from London. We look forward to having you on the program again. 

Erik Norland 

Thank you. Anytime. 

Andrew Wilkinson 

And to our listeners—don’t forget, if you enjoyed today’s episode, please subscribe wherever you download your podcasts. Bye for now.